Where Is The Value In Health Care?

It seems that everywhere you look “value-based purchasing” (or value-based care) is hailed as the savior of U.S. health care. With it, comes the promise of a system that pays for quality rather than volume. Following the money tells the same story – cloud-based EHR giant Athena Health, for instance, just beat Q2 revenue estimates by about $3 million, and saw revenue up nearly 27 percent from the same period last year. More broadly, hospitals appear to be investing heavily in tracking the value of the care they deliver: a Leap Frog Group survey notes that the number of hospitals using computerized physician order entry has increased from 10 percent in 2009 to 43 percent in 2013.

If nothing else, however, the prospect of value-based care is an appealing message. After all, for decades, American health care has been defined by opaque prices far removed from actual costs, a fragmented care delivery system, and for the most part, a dearth of information about what we actually get for our money.

First, it pays to understand what value-based purchasing means. While hundreds of pages can be (and have) written on this subject, we’ll stick to a very simple definition from Deloitte:

[VBP is] a payment methodology that rewards quality of care through payment incentives and transparency.

In short, value-based payments are those that offer incentives for quality and transparency, while offering disincentives for overtreatment and opacity. Value-based care, then, is just an extension of this – in theory, all medical care has “value” (though the marginal value of some care can be zero or even negative). But the idea is that value-based care responds to incentives created by value-based payments, to maximize the value of care delivered to a given patient.

In recent years (and months), we’ve finally seen examples of value-based payments and care – and while the results are mixed, it appears that both providers and payers are starting to recognize and invest in the coming shift.

Health Care Costs (Photo credit: 401(K) 2013)

For instance, a recent survey commissioned by McKesson found that 90 percent of payers and 81 percent of providers are already using some form of value-based purchasing. Both expect fee-for-service to decline dramatically over the coming years. A 2013 scorecard from the Catalyst for Payment Reform noted that around 10.9 percent of all commercial in-network payments were “value-oriented,” putting us more than halfway to their target of 20 percent by 2020. Q1 GDP numbers were also, at least partly, depressed because hospitals actually lost revenue. Causality is tough to prove, but there’s some reason to think that hospitals are making future-oriented tradeoffs. Here’s former OMB director, Peter Orszag:

One factor is that the systems are being digitized, so hospital executives have a much better sense of what's going on within the hospital and can target waste. The second thing is that the payment system is changing, and it's expected to continue to change.

If hospitals and other providers (who bear significant risk in a move to value-based payments) are starting to change current business models in anticipation of more value-based payments, it’s hard to argue against such a trend. Moreover, the ACA’s implementation of accountable care organizations and patient-centered medical homes puts even more pressure on providers to adapt.

It’s instructive to remember, though, that the move towards a value-based health care system isn’t new. And going forward, there are many “lessons learned” that can inform us about what works and what doesn’t – from both the commercial and the public sector.

Medicare Advantage

In the public sphere, one of the shining examples has been Medicare Advantage (MA) – a program through which Medicare beneficiaries can purchase private insurance coverage as an alternative to the traditional government-run program. Under MA, plans bid to provide coverage for Medicare beneficiaries, and are paid a fixed rate per month for each enrollee. Among MA plans, the most popular tend to also be the most “managed” – HMOs make up about 70 percent of total MA enrollment, and 19 percent of total Medicare enrollment. These plans also tend to be the ones that try to implement the most value-based payments – with some even using a fully-capitated model, paying hospital systems a fixed monthly amount to take care of beneficiaries. While data is somewhat sparse, existingstudies have found improvements in health outcomes, reductions in hospital readmission rates, and spillover benefits to traditional Medicare.

MA certainly isn’t perfect – as it stands, the program spends more money per beneficiary than traditional Medicare would. Whether better outcomes are contingent on spending extra money isn’t clear – but under the ACA, these additional payments are set to decline over time. Nevertheless, the program has demonstrated that paying for value can exist in the public sector, too.

Private Sector – Kaiser Permanente

But value-based payments have also permeated the private sector – perhaps best exemplified by a Kaiser Permanente, a California-based hospital system that has made commitments to value and transparency.

The California-based hospital system and insurer, Kaiser Permanente, is often help up as a gold standard, and rightfully so. One study found that with improved “a comprehensive delivery system redesign and expanded and integrated existing clinical information systems, decision support, work flows, and self-management support,” Kaiser’s Southern California branch averaged a 13 percent improvement on 51 health metrics, versus a median 5.5 percent nationally.And Kaiser is also credited with not-insignificant health care savings – with a disease registry program saving about $30 million annually.

Critical to Kaiser’s success has been significant investments in health IT – with a powerful electronic health record system (KP HealthConnect) that helps avoid duplicative testing and treatment, while also helping to shine a light on inefficiencies in care. The lesson here is about the power of EHRs designed deliberately for improving care rather than simply paying lip service to an IT trend.

Lessons To Be Unlearned

Despite some shining examples of success, value-based payments have a nastier side as well. Most notorious perhaps is the uncertainty about whether Managed Medicaid (a form of Medicaid contracting where states pay managed care organizations to provide care for beneficiaries) has managed to deliver any cost savings or improvements in health outcomes. In a synthesis of numerous studies, Michael Sparer of Columbia University explains:

The peer-reviewed literature finds little savings on the national level…There is some evidence that Medicaid managed care improves access to care, but the scope of the improvements is state-specific and depends on how access is measured.

Indeed, there is enormous variation in state Medicaid programs, which could help explain some of the variation in results. But overall, Sparer notes a number of factors that limit the potential for cost savings or improved outcomes from Managed Medicaid including: the fact that Medicaid already has very low rates and that increasing access to care may lead to higher costs itself. When it comes to outcomes, Sparer focuses on the difficulty of attributing health outcomes (which are functions of a web of complex factors) to any one particular cause. But in assessing coverage that requires significant upfront investment – any value-based system will incur a high fixed cost – it would seem that “stickiness” or volume are crucial. And the Medicaid market is generally more volatile than the private insurance market or Medicare. According to the 2010 Medical Expenditure Panel Survey, for instance, about 86 percent of people with private insurance had coverage throughout the year, while only 68 percent of those with Medicaid coverage retained it for all twelve months. Not only is this stickiness important for offsetting the cost, but it is also very difficult to manage the health of a population that bounces in and out of coverage.